Decoding IFRS 17: The Blueprint for Transparent Insurance Reporting

IFRS 17 was published in May 2017 with its implementation was effective for financial reporting periods starting from January 01, 2023. IFRS 17 Insurance contracts establishes principles for recognition, measurement, presentation, and disclosure of insurance contracts.

IFRS 17 applies to all insurance contracts –

Including reinsurance contracts issued
Reinsurance contracts held.
Investment contracts with discretionary participation features.

Note: Entities cannot apply IFRS 17 to warranties, employee benefit plans as per IAS 19 & IFRS 2, contractual rights or contractual obligation on right-of-use assets, a non-financial item.

If an insurance contract contains non-insurance component(s) then the entity must separate the non-insurance component from insurance and account under the other relevant IFRS.

Level of Aggregation of Insurance Contracts

An entity applying IFRS 17 has to have a level of aggregation of insurance contracts. This means that companies should assign the insurance contract to a portfolio. A portfolio is a larger grouping of contract with a similar risk and the entity can divide the portfolios into 3 groups minimum, those are –

Contracts that are onerous at initial recognition.
Contracts at initial recognition have no significant possibility of becoming onerous subsequently.
Remaining contracts in the portfolio

An entity can then subdivide the groups based on other factors such as profitability or the probability of becoming onerous. At the end if the entity’s internal reporting provides information at a more detailed level, to that extent the entity can group the insurance contracts.

It is important to note that an entity shall not include contracts issued more than one year apart in the same group.

Initial Recognition

An entity shall recognise a group of insurance contracts it issues from the earliest of the following:

Measurement on Initial recognition

The above is the General Model which applies to all insurance contracts, mainly onerous contracts where the entity must recognize loss immediately in the statement of profit or loss.

For non-onerous contracts entities should not recognize any profit on initial recognition. Any profit throughout the period of the insurance contract performs is what will be called Contractual Service Margin.

In fulfilment cashflows, to attain the present value of future cashflows which is part of the fulfilment cashflows as per the above diagram, the entity will apply discount rates that reflect –

The liquidity characteristics of the insurance contract
Consistent with observable current market price for financial instruments that match the characteristics of the insurance contract.
Exclude factors that affect financial instruments but not the insurance contract.

Contractual Service Margin represents the unearned profit the entity will recognize as it provides insurance contract services in the future.

Therefore, in the statement of financial position (SOFP) under the General Model, the Entity will show only one single amount as “Insurance contract liability” or “Insurance contract asset” which will be after deducting the liability of past incurred claims.

Subsequent measurement

If 20X3 to 20X4 is liability of past claims and and 20X4 to 20X6 is the estimated liability of remaining coverage period. Then the carrying amount as per reporting period 20X4 would be –

the fulfilment cash flows related to future service allocated.
the contractual service margin of the group at that date.
the liability for incurred claims, comprising the fulfilment cash flows related to past service allocated.

As to recognizing income or expenses related to change in in the carrying amount of liabilities for remaining coverage and incurred claims in insurance contracts.

For liabilities related to remaining coverage:

Income (insurance revenue) is recognized for the reduction in the liability due to services provided during the period.
Expenses (insurance service expenses) are recognized for losses on onerous contracts and reversals of such losses.
Income or expenses (insurance finance income or expenses) are recognized for the effects of time value of money and financial risk.

For liabilities related to incurred claims:

Expenses (insurance service expenses) are recognized for increases in the liability due to claims and expenses incurred during the period, excluding any investment components.
Expenses (insurance service expenses) are recognized for subsequent changes in fulfillment cash flows related to incurred claims and expenses.

Income or expenses (insurance finance income or expenses) are recognized for the effects of time value of money and financial risk.

Premium Allocation Approach (PAA)

An entity can use simplified approach for a group of insurance contracts only if at the inception of group of contracts –

The difference between the General Model & PAA approach will not produce a material difference.
The coverage period of the contract is one year or less.

Measuring liability for remaining coverage at initial recognition –

Particulars	Amount
Premium received at initial recognition (if any)	X
Less: Insurance acquisition unless entity decides to recognize it as an expense	(X)
Liability of remaining coverage at initial recognition	X

Subsequent recognition –

Particulars	Amount
Carrying amount of liability	X
Add: Premium received during reporting period	X
Less: minus insurance acquisition cash flows, unless the entity chooses to recognize the payments as an expense	(X)
Add: amortization of insurance acquisition cash flows recognized as an expense in the reporting period	X
Add/Less: Any adjustment to financing component	(X)/ X
Less: Insurance recognized as revenue for service provided during the period	(X)
Less: Any investment component paid or transferred to the liability for incurred claims	(X)
Liability of remaining coverage at end of reporting period	X

Incase during coverage period there is an indication that the contract will be an onerous contract, then the entity will calculate the difference between –

the carrying amount of the liability for remaining coverage determined.
the fulfilment cash flows that relate to remaining coverage of the group.

Incase fulfilment cash flows exceed carrying amount of liability then, recognize a profit or loss and increase the liability for remaining coverage.

Presentation in the statement of financial position

An Entity shall present separately in the statement of financial position the carrying amount of portfolios of:

insurance contracts issued that are assets.
insurance contracts issued that are liabilities.
reinsurance contracts held that are assets.
reinsurance contracts held that are liabilities.

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